Energy

Belarus' Quixotic Leader Defies Russia

In August, a Greek-flagged tanker docked at the Lithuanian port of Klaipeda, after a 5,500 mile journey from Venezuela. The ship unloaded 80,000 tons of Venezuelan crude, which was then moved by rail to the giant Mozyr oil refinery in the landlocked nation of Belarus. More deliveries to Belarus—the first shipment arrived via Odessa in May—are scheduled for this year and next.

Venezuelan oil in Eastern Europe? The traditional oil source for Belarus, an ex-Soviet republic, has been Russia, its neighbor and longtime patron. A decade ago relations between Belarus President Alexander Lukashenko and the Kremlin were so close that he agreed to a union with Russia. When Vladimir Putin became Russian president, though, the Russians put the union plan on hold and in 2007 proposed a common trade bloc with Belarus and Kazakhstan.

Lukashenko has dragged his feet on joining, and though he has agreed to the deal, he has exasperated the Kremlin by revisiting the terms of Russia's oil and gas sales to Belarus. The Belarus leader has lambasted Putin in public. Belarus state TV even aired an interview with the President of Georgia, with which Russia fought a five-day war in 2008.

Stung by what it sees as a lack of support, the Kremlin has threatened to stop subsidizing its oil and gas sales to Belarus. For years Belarus got Russian oil at a 36 percent discount to Russia's export duties, a gap Belarus exploited by selling much of the oil at higher rates to Western Europe. Belarus can ill afford to lose the subsidy—worth $4.2 billion this year, according to Putin—and has sued Russia in the CIS Economic Court, which presides over cases involving the old Soviet republics. The subsidy is equal to 7.6 percent of Belarus' gross domestic product.

In his struggle with Russia, Lukashenko has explored an alliance with the European Union. The EU, however, regularly blasts Belarus for human rights violations and wants democratic reform in Belarus to precede any financial support. So Belarus has started looking further afield. "Lukashenko is afraid to be left one-on-one with Russia. He wants to show that he has some alternatives," says Arkady Moshes, program director for research on Russia at the Finnish Institute of International Affairs in Helsinki.

Which leads back to Venezuela. In March, Lukashenko cut a deal with Venezuelan President Hugo Chávez. Oil from Venezuela would, according to Belarus, replace Russian supplies and allow the new partners to sell oil products to Europe. Analysts say the arrangement is not commercially viable at the moment, suggesting at least one side is acting out of political rather than economic interests. Chávez may be using his new ties with Belarus to show his global influence, according to Chris Weafer, chief strategist with UralSib Capital. "It's all part of the geopolitical game," he says.

Lukashenko has other cards to play. A quarter of Russia's oil exports flow through Belarus via a pipeline to the rest of Europe. Russia needs that pipeline, so it cannot provoke Belarus so much that Lukashenko shuts it down. The biggest chip Belarus possesses, however, is potash, a key ingredient in fertilizer. Belarus' mines have 1 billion tons of the stuff, the third-largest reserves after Canada and Russia.

In January Chinese Vice-President Xi Jinping visited Belarus and pledged $10 billion in Chinese investments in addition to a $5.7 billion credit line. The Chinese also bid for a stake in Belaruskali, the state potash producer. Developing a potash business with the Chinese would weaken Russia's grip on Belarus. Lukashenko has to be careful, though: Selling too big a stake would give the Chinese leverage to demand lower prices.

The Russians have retaliated. Two state-run Russian television channels that can be viewed in Belarus ran documentaries on Lukashenko's treatment of the opposition. Putin has tried the carrot as well as the stick. As Europe voiced fears earlier this year that the oil pipeline would be turned off, he offered, for one more year, to sell Belarus the 6.3 million metric tons of oil it needs for domestic use under the usual favorable terms.

The Venezuelan crude keeps coming. Shipments will be 4 million metric tons this year and twice that next year, says an official in Lukashenko's administration, who in line with state policy declined to be named. "Many experts just don't understand the prospects of the Belarus economy," says the official. "They can think what they like. The conflict has been a positive factor, pushing our companies to look for new markets." Analyst Weafer points out that geography may be destiny: "Russia and Belarus are stuck with each other."

The bottom line: Belarus is seeking new economic ties with the rest of the world, especially Venezuela and China. Its potash mines are a big asset.

Quotations from Chairman Lukashenko

If someone in the West thinks that our relations with Russia have soured and now we can bring Lukashenko around and he'll let all the prisoners out of jail, they are much mistaken! — Aug. 20, 2009

"Despite the fact that Russia keeps scratching various parts of our body, we are not dead set against it. We adequately assess what's going on. — Sept. 14, 2010

"During the last election, 93 percent of the people voted for me. I admitted that I had falsified the results. I gave an order so we wouldn't have 93 percent but somewhere in the region of 80 percent. — Aug. 27, 2009